The Alternative Minimum Tax (AMT) impacts roughly 5-7% of high-income earners annually. If you earn $500,000+ with substantial deductions, you may be subject to AMT. The IRS imposes whichever is higher: regular tax or AMT. For many high earners, AMT becomes the limiting factor.
How AMT Works
Under IRC 55, you calculate AMT by taking regular taxable income and adding back certain disallowed deductions. These "AMT adjustments" include depreciation, certain passive losses, and some state/local taxes. The result is "alternative minimum taxable income" (AMTI), taxed at 26% or 28% (much lower than the 37% top regular rate).
Common Triggers for AMT
Depreciation on real estate, passive activity losses, incentive stock option exercises, and certain deduction limitations trigger AMT. A high-earning professional with a large ISO exercise, a cost segregation study, and passive losses easily hits AMT.
Example
A physician earning $400,000 receives $200,000 in ISO options. The spread is $150,000. Under regular tax, the physician owes roughly $120,000 in federal taxes. Under AMT, the ISO spread adds to income, making AMTI $550,000, subject to 28% AMT, or $154,000. The physician pays $34,000 more in AMT.
Strategies to Minimize AMT
1. Time Depreciation Deductions - If a cost seg study triggers AMT, consider spreading depreciation over multiple years instead of claiming full deduction in year one. 2. Defer ISO Exercise - If you know you'll hit AMT, defer exercise to a lower-income year. 3. Harvest Losses - Both regular tax and AMT allow capital loss deductions. Harvesting reduces AMTI and regular income. 4. Use Timing of Passive Losses - Defer passive losses to years when you're not in AMT.
The AMT Credit
When you pay AMT in one year, you generate an Alternative Minimum Tax Credit (AMTC) equal to excess AMT paid. This credit carries forward indefinitely and offsets regular tax in future years when regular tax exceeds AMT. However, this is just a deferral, not elimination, of the AMT.
Who Should Model AMT?
If you earn $500,000+ and have any significant real estate holdings with depreciation deductions, stock option exercises, large charitable contributions, or passive activity losses, model your AMT exposure. Running an AMT calculation takes your CPA 1-2 hours and could reveal $10,000-50,000 in savings through strategic deduction timing.